Fonterra plans dairy acquisition as melamine probes mount

New Zealand’s Fonterra said it is targeting two dairy farms in northern Hebei province in an effort to boost milk supplies to match growing demand. Fonterra, the world’s largest dairy exporter, is trying to resurrect its China business after exiting its US$201 million investment in Sanlu, the mainland dairy which collapsed after the 2008 melamine-contamination scandal.

Fonterra’s announcement comes at an awkward time. The government has launched yet another nationwide probe into tainted milk products following revelations that remnants of contaminated milk powder from the 2008 tragedy which had been recalled, but not destroyed, have reentered the food chain. Consequently, tainted goods were sold by five dairy manufacturers. Despite Fonterra’s aim of cultivating a "safe, secure and sustainable milk supply in China," worries over product safety are justifiable, as are fears over what official investigations will uncover; several dairies have had their products pulled from supermarket shelves so far this year in connection with melamine contamination.

The impact on listed companies has been profound: Bright Dairy & Food Co (600597.SH) announced last week that it had finally returned to profit last year after booking a net loss of US$41.87 million the year before as a direct result of the contamination story. That said, investors have exhibited a confidence in the market that consumers have yet to share. Notably, Hopu Investment Management and Cofco (Hong Kong) jointly snapped up a 20% stake in China Mengniu Dairy (2319.HK) for US$790 million last year, a demonstration of faith in the long-term potential of this relatively young industry.

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